If you are new to finance, you might be confused by the term “asset finance”. Though this jargon seems complex, but it’s quite simple. Let’s start with the basics: what is asset finance and how does it work?
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What is an Asset?
An asset is an item that has value. Buildings, equipment and vehicles are typical examples of assets. Businesses use assets to effectively run their regular operations. These can be used to pay off debts, getting a loan, and for many other purposes.
What is Asset Finance?
Asset Finance is a great choice for small businesses to grow. It leverages the value of assets like buildings, vehicles and equipment. If you need assets for your business and can’t make the cash payment for them outright, asset finance can help you to get it. This process makes it easier for you to pay by spreading the asset’s cost into smaller or regular payments, for a certain period. However, you need to pay an extra fee and interest above the cost of the assets. Equipment on lease and hire purchase are common examples of it.
Now that you know what is asset finance, let’s see what are its types.
Asset Finance: Types
The most common types of asset finance are:
1) Hire Purchase
Hire purchase provides you with the opportunity to purchase new assets for your business on instalment instead of paying a large sum outright. After completing the payments, you are given ownership of the asset.
2) Finance Lease (capital lease)
It is the process where a leasing firms purchase business assets on your company’s behalf and provide it to you on a rental basis. Here, you can make payments every month until you pay for the cost of the asset along with the interest. Afterwards, you can choose to spread the rental period, give back equipment or dispose of or sell it to a third party on behalf of the provider.
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3) Equipment Leasing
It is the process of getting the plant or equipment that your company wants for a limited period or it never wants to own. You pay for the asset for a certain period until you hold it. Here you get the choice to upgrade the equipment whenever you need it. It can prove to be inexpensive than a finance lease. Moreover, the company who rent you the equipment bears the responsibility of maintenance.
4) Asset Refinance
Asset refinance generally has two types. In the first type, the company uses its assets as security to get loans. In such a case, the lender may sell your asset to recover their funds in case of a default. The second category is asset-based lending, where you sell physical assets to a finance company for an agreed outright amount. Afterwards, you have the choice to lease back the assets from the finance provider. It then allows you to free up a large amount of cash, repay it in the incremental form for an extended period and utilise the asset during the repayment process.
5) Contract Hire
This is specifically designed for vehicles. Here the provider finds and maintains the business vehicles for business, who agrees to pay regular instalments for an agreed lease term. In the end, the provider takes the responsibility for the disposal of the vehicles.
How Does Asset Finance Work in the UK?
The asset finance industry is rapidly growing in the UK with an annual growth of 6% each year. The reason for this is the ease of getting big-ticket items and getting the advantage of using an asset as you pay for it. With asset finance, you can save your asset capital on the depreciated assets and can pay less interest and fees on it by getting asset security.
Summing Up
Hopefully, you have got sufficient information now on what is asset finance and how does it work. In addition, you have also got to know that it is a great funding solution for your small business for getting new items or getting a great amount of cash from the assets that you already possess. There are a lot of lenders depending upon this industry type. With this introductory information to asset finance, you can now easily get funding for your upcoming business assets.
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Disclaimer: This blog is written to provide basic information on asset finance.